Laura Felice: I’ll jump in quick on the comp piece. Just to add a little bit more color on that. So we expect it to improve over the course of the year. The only additional thing I’d add in there is, remember the lead times on general merchandise, it takes time to get that product into the system. We, Rachael, has spent a lot of time building the talent. That new talent has been here for about a year. So I would expect when you go into the clubs now, you’ll see some of that assortment, the new assortment and more of the new assortment in the back half.
Rachael Vegas: Yes. Bob and Laura answered that very well. And I think that’s right. We’re very committed to general merchandise as evidenced by the investment we’ve made in great talent, and we do have really long lead times. So we’re not quite at the one-year mark for our new team members. And with that, the real newness will start this summer. What you’ll see, I think, today is probably more of updates on how we present a lot of our general merchandise assortment. And then in the back half, you’ll start to see a lot more newness coming to our sales floor.
Ed Kelly: Two questions here. Laura to start — it’s Ed Kelly by the way, at Wells Fargo. Your ’23 guidance comps, I think, were probably better than most of us expected. I think your gross margin, merch margin guidance was better than most of us expected. But you’re still with sort of like flat year-over-year EPS growth, including the extra week. And I think if we all took a step back, we probably thought that, that would be better on that comp and margin guidance. So maybe just a little bit more color on what you’re expecting from the fuel side and the level of conservatism there. And then within OpEx, you also talked about new store ramp, some drag associated with that. Maybe just a little bit more color on those line items.
Laura Felice: Yes. Thanks for the question, Ed. There’s two things I’d say. One, as we thought about our comp sales build for the year, the thing we’re most excited about are our membership stack that we’ve seen and continue to see and the traffic that’s showing up in our clubs. We factored that into our comp sales for the year and our expectations. I talked a little bit about in my prepared remarks, we think it will be weighted to the first quarter, and the remaining quarters will kind of even out in the back half. So I would make sure you think about it in that context. I think the merch margin improvement that we’ve set for the year, that’s really a reset. We’re going to take back kind of what we gave away this past year and reset our levels.
You pick up on the most important point, which is my second point, on the gas business. So that’s a pretty big unwind from this year. As we think about the volatility that was in the gas business, which we talked about quarter-over-quarter-over-quarter this year, it kind of was the same story. That volatility provided a lot of excess gas profits. I don’t think I can predict that. I pretty clearly said that I can’t predict that. So we’ve kind of stripped that back. What we do think is that we will keep the comp gallons that we grew, we grew that in the fourth quarter, 11% from a comp gallon perspective despite the industry being down. So we think we’ll retain those gallons and grow them a little bit next year, but not the profitability that we saw this year.
Ed Kelly: Just a quick follow-up on that and related to OpEx. The investment that, new clubs, right, will have that layers in. But also, is there anything underneath of that, that you would consider a bit outsized, whether it be labor or something else from an OpEx standpoint that’s creating some drag there.
Bob Eddy: Let me just build on the gas point for one second before we go to OpEx. Gas is not necessarily about making money for us. It is definitely a profitable business. It was a wildly profitable business last year relative to historical norms. But gas is about providing member value. It gets people in our parking lots. It is the most visible commodity out there. Everybody knows the price of gas. They may not know it to the penny, but they know a good one and they know a bad one, and we have the best ones in town, now with up to $0.15 off if you use your co-brand credit card. And so we have gained incredible share over the past couple of years. I think our two-year gallon stack in Q4 was like 28% or 29%, while the market was flat or down, depending on which metric you look at.
Our members are reacting to what we’re doing in the gas business. We will continue to operate it in that fashion. With that said, gas is getting a little bit more profitable structurally, right? It’s very hard, as Laura said, to predict any one quarter or any one year, especially the last three or four years. But I do think where we normally saw a $0.07 to $0.09 per gallon profit in our gas business, that’s more in the low teens in a normalized environment. In this past year, we were over 20. So that comes — that incremental delta between sort of 12 or 13 and 20 comes from the excess volatility that we saw. The delta between seven and nine is the entire industry getting a little bit more profitable. And we’re talking a little bit at the break about this.
That is really, I think, industry-wide as it’s more expensive to build a station and more expensive to operate a station. People are — that run stations are getting a little bit smarter about pricing gasoline to cover their cost, right? But our aim really is to provide that member value, to have the best prices in town. Those of you that will come with us on the tour, you’ll see a gas station over in , Massachusetts, does over 10 million gallons a year, incredible stats, sort of eight-or-so times what a normal C-store would do. That is emblematic of what we’re trying to do in the gas business, right? Put a great price on it, get people in our parking lots. They come into our stores and buy our food and our general merchandise. And so I just wanted to say that.
OpEx is under a little bit of pressure as we build the clubs. It’s not unexpected, right? It is from what Bill said, as we open new clubs, they scale over five years from a revenue perspective, but we don’t typically descale the cost base in the first couple of years as it ramps. We want to provide a wonderful experience from day one, and our teams in the field have done that. And so our cost base comes in higher and our revenue sort of grows into the cost base. And so as we continue to add more and more clubs, you see a little bit of that pressure coming through. That will be true this year or probably be true next year until we kind of have a full run rate. And there’s certainly some other things growing depreciation, as Bill talked about, as we grow, owned clubs that will grow a little bit.
And we will continue to invest in our team members, right? I talked a little bit about the cultural point, and one of the first things I said would have taken care of the families that depend on us, that is not just our members. That is our team members. And it is part of why we’re here is to take care of them so that they take care of our members, right, in the go back to the name of this building, right, the Club Support Center. We’re here to support them so that they support our members. We are paying them more today than we paid a couple of years ago. We will pay them more tomorrow than we do today. So we’ve built in some money to do that. That is in recognition of what we’re all seeing in the labor environment. It is also in recognition of the fantastic job that they’re doing serving our members, too.
So I think that’s — that should address your question there.
Kate McShane: Kate McShane from Goldman Sachs. Our first question is just around commentary about markdown pressure. It didn’t seem like you called that out in the fourth quarter. So we’re curious about that. And then our follow-up question is just about guidance. Where does guidance go if there is a membership fee increase this year?
Bob Eddy: So we did have some markdowns in Q4 but certainly not an abnormal amount. I think the markdowns, Laura talked about, and I’ll hand it off in a second, we’re really earlier in the year. And everybody knows the story, right? Nearly everybody in the industry had too much inventory. We had a little too much — not a lot too much, but still that — combined with the fact that many of our competitors were marking down tremendously in order to stay competitive. We did so as well. And so particularly in first quarter and second quarter, we had a pretty significant amount of markdowns and that I don’t think will reoccur this year, which is wonderful. It’s not something we’re used to doing. And we will invest all day long in pricing.
But sort of investing in that scenario, we don’t love to do, obviously. We feel much better about our general merchandise inventory, in particular, in terms of the levels and the quality at this point. And so we should get that back in the lab this year. You want to build on that a little bit?
Laura Felice: No, I think you hit everything on markdowns. That’s specifically why we didn’t call it out in Q4 because there wasn’t a whole lot to speak of. The team was really diligent about making sure we had the right level of inventory and the right assortment for our members, and that kind of came through. Remind me what your second question was?
Bob Eddy: Fee increase.
